The Federal Reserve System Essay -- History Banks Financial Federal Re

The Federal Reserve System Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.   Ã‚  Ã‚  Ã‚  Ã‚  There was the occasionally belief on behalf of the public that banks would not be able to, or outright refuse to honor their banknotes. This fear, if held by enough of a community, could lead to a run on the banks. In a single day, demands for exchange of banknotes for gold and silver would be made by a majority of the people if there was doubt concerning the ability of a bank to redeem its notes. This problem would be compounded when this fear spread to other banks. Runs on a single bank would escalate and spread from one bank to another causing financial panic (http://www.dallasfed.org).   Ã‚  Ã‚  Ã‚  Ã‚   Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the demand for funds quickly became powerful and widespread. During these periods of high demand, banks from across the nation called on the central banks to supply the funds (Federal Reserve System 5th ed pp. 10-11).   Ã‚  Ã‚  Ã‚  Ã‚  At the time, there were not adequate facilities available to meet the demand for additional funds. Bank’s reserves of money were stored around the nation at 50 locations. The reserves were not able to be shifted quickly to the areas that were experiencing increases in withdraw demand. The immobility of reserves only added another element to the financial panic (Schlesinger pp. 41). The credit situation would become tense. Since the banks coul... ...Governors is also the chairman of the FOMC. Its principal duty as described under law is the supervision of open market operations that principal method of federal monetary policy (Federal Reserve System 8th ed. pp. 12).   Ã‚  Ã‚  Ã‚  Ã‚   The Federal Reserve System will always be necessary to maintain economic stability and uphold the value of the dollar. The Fed is able to make the necessary decisions that protect the nation from unexpected threats to the economy. Through times of crises and prosperity the Fed will â€Å"be operating behind the scenes of the banking industry to make sure money is a positive force in American BIBLIOGRAPHY Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress Author Unknown (1994). The Federal Reserve System: Purposes and Functions (8th ed.) Retrieved Feb 3, 2005. http://www.federalreserve.gov/pf/pdf/frspf1.pdf Schlesinger, A.M. (1989). The Federal Reserve System. (pp. 41-45, 75). Chelsea House Publishers http://www.dallasfed.org/fed/understand.html http://www.stlouisfed.org/publications/pleng/history.html http://www.u-s-history.com/pages/h1052.html